By CA MANOJ KUMAR C/O MANOJ KUMAR MITTAL & CO.

CHARTERED ACCOUTANTSPh No. 9810764620

“The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions has made the issue of transfer pricing a matter of serious concern. I had set up an Expert Group in November 1999 to examine the detailed structure for transfer pricing legislation. Necessary legislative changes are being made in the Finance Bill based on these recommendations.”

Shri Yashwant SinhaFinance Minister Government of

India February 28, 2001

Sec Particulars Applicable

92 Computation of income from international transaction and SDT having regard to Arm' length price

Yes

92A Meaning of Associated Enterprises NO

92B Meaning of International Transaction No

92BA Meaning of Specified Domestic Transaction Yes

40A(2)(b )

Payment to relatives Yes

92C Computation of Arm' Length Price Yes

92CA Reference to TPO Yes

92CB Power of Board to make safe harbour Rule No

92CC Advance Pricing Agreement No

92D Maintenance of documentation Yes

92E Audit Report-Form 3CEB-Applicable Yes

271AA Penalty for non maintenance of documentation or information of transaction

Yes

271BA Penalty for failure report u/s92E -3CEB Yes

271G Penalty for furnish documentation and information u/s 92D

Yes

271(1)(c)

Concealment of Income or furnishing of inaccurate Particulars

Yes

Rule-10A Meaning of expression used in computation of ALP

10AB Other method of determination of ALP introduced by finance Act, 2012

10C Most Appropriate Method

10D Information and documents to be maintained u/s 92D

10E Audit Report U/s 92E

Relevant Circular and notification-Circular NO. 6-P, Dated 6-7-1968 and circular NO. 4-P[LXXVI-65], dated 7-6-1968

Circular No. 14 dated 20.11.2001 containing explanatory notes Circular No. 2 dated 26.03.3013-Application of profit split method-

withdrawn Circular N0. 3 dated 26.03.2013-Condition relevant to identify

development centre engaged in contract R& D service with insignificant risk

Notification No. 30 dated 15.04.2013 explaining tolerance limit Circular No.6 dated 29.06.2013 amending circular no. 3 For related Party, reference is to 40A(2)(b)-Related Party AS-18

Difference between price and transfer Price

Price means the price at which transaction takes places between party

Transfer Pricing means the price at which the transaction takes places between two related enterprises.

Due to special relationship between related enterprises, the transfer price may be different from price for any transaction.

Arm’s Length Price(Sec 92F(ii))- It means a price which is

applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions;

Sec 42(2) of the Income Tax Act, 1922 Where a person not resident or ordinary resident in the taxable

territories carried on business with a person resident in the taxable territories, and it appears to the income tax officer that owing to the close connection between such persons the course of business is so arranged that the business done by the resident produce to the resident either no profit or less than the ordinary profit which might be expected to arise in that business, the profit derived therefrom, or which may reasonably be deemed to have been derived therefrom shall be chargeable to income tax in the name of resident person who shall be deemed to be for all the purpose of this Act, the assessee in respect of such income tax.

It is substituted by section 92 in Income Tax Act 1961 which was further substituted by section 92 to 92F by the finance Act 2001.

“The larger issue is whether Transfer Pricing Regulations should be limited to cross-border transactions or

whether the Transfer Pricing Regulations to be extended to

domestic transactions. In domestic transactions, the under-invoicing

of sales and over-invoicing of expenses ordinarily will be revenue neutral in nature, except in two circumstances having tax arbitrage such as where one of the related entities is i)loss making or (ii) liable to pay tax at a lower rate and the profits are shifted to such entity.

The CBDT should examine whether Transfer Pricing Regulations can be applied to domestic transactions

between related parties u/s 40A(2) by making amendments to the Act.

Related Party

Resident

DomesticTransaction

*Goods*Services

*Intangibles*Loans

Independent Party

Resident

Specified Domestic Transaction (not being international transaction) will be subject to transfer pricing at par with the norms applicable to International transaction.(Sec 92(2)

In respect of Specified Domestic Transaction, an allowance for an expenditure or allocation of any cost or expense or income shall be computed as per ALP and however, no computation shall be made which result in reducing income or increasing loss. Sec 92(2A) or 92(3)

MAT liability will continue as per books.

Sec-92BA-Meaning of Specified Domestic Transaction-Scope of the sectioni) any expenditure for which payment made or to be made to a person covered u/s 40(A)(2)(b)

ii) Any transfer of goods and services between eligible units and non eligible unit of two associate of an undertaking -(80)(IA)(8)

iii) Any business transaction with entities having close Connection-80(IA)(10)

iv) Any other transaction as may be specified.

Section Particulars Explanation

Payment to Associate Enterprise-Single Edge

92BA(i) An expenditure for which payment made or to be made to person referred in Sec 40(A)(2b)

Applicable to taxpayer making payment and incurring expenditure and not to receipent of income and not applicable to notional expenditure.

TAX HOLIDAY UNITS- Double Edge

92BA(ii) Any transaction referred in sec 80A –It refers to section 80A(6)

Any transfer of goods and services between two associate enterprises to which profit linked deduction apply and cover both income and expenditure.

92BA(iii) Any transfer of goods and services in 80IA(8)

Any transfer of goods and services between two associates enterprise to which profit linked deduction apply-Intra Unit

92BA(iv) Any business transacted between assessee and other person having close connection or for any other reason-80 IA(10)

Transfer of goods and services between two enterprises having close connection. The word close connection no where defined but also find reference in Sec 42(ii) of 1922 act.-Closely connected entity

Sec 92BA(v)

Any transaction referred in sec under chapter VI A or Sec 10AA to which 80(IA)(10) or (8) is applicable

Scope for transfer of goods and services is being enlarged covering all transaction under chapter VI A or Sec 10AA.

others Sec 92BA(vi)

Any other transaction It may be specified in future.

Section Tax Payers covered Applicability of TP provisions on SDT aggregating a value of more

than INR50 million

40A(2) Applicable to taxpayers making payment / incurring expenditure and not to recipients of such income

The reasonableness of payments is to be computed with regard to the arm’s length price.

80A(6) Enterprise claiming deductions from total income under chapter VI-A

The goods and services of an eligible business are to be transferred to any other business carried on by the same taxpayer and vice-a-versa, to meet the arm’s length test.

80IASub Section (8)And (10)

Infrastructure developersTelecommunications service providersDevelopers of Industrial parksProducers or distributors of power

An enterprise with an eligible business and close connection with any other person

The goods and services of an eligible business transferred to any other business carried on by the same taxpayer and vice-a-versa, are to meet the arm’s length test.

With reference to Sub Section (10), a business transacted between a taxpayer carrying on an eligible business with a close connection, which results in more than ordinary profits too the business, is to meet the arm’s length test.

Section Tax Payers covered Applicability of TP provisions on SDT

aggregating a value of more than INR50 million

80-IAB Developers of SEZs

The provisions of section 80IA Sub section (8) and (10) are to apply to an undertaking referred to in these sections.

Small Scale industry engaged in operating Cold storage plant

Industrial undertaking in industrially backward state as mentioned in VIII Schedule (ex : Jammu and Kashmir)

Multiplex theaters and convention centers

Company carrying on scientific research and development

Eligible housing projects Eligible hospitals

80-IC / 80-IE Persons with units in specified states / north-eastern states claiming deduction

80-ID Hotels located in districts with World Heritage sites

10AA Persons with income from SEZ units

Section Covered Unit

80-IB Industrial Undertaking

80JJA Collection and Processing of Bio-degradable waste

80JJAA Employment of New Workman

80LA Offshore Banking units and international financial services centre

80P Cooperative Socities

The above provision will be applicable if the aggregate of such transaction exceeds Rs 5.00 Cr.

Whether notional income principle will be applicable for clause 80(IA)(8) or (10)-YES

A pays rent of Rs. 4 crores to B ltd and pays interest on loan of Rs, 1.5 crores to C, as the aggregate of transaction exceeds Rs. 5 Cr, it will be covered. The aggregate is to be seen of the six limbs together and not only one limb

Section Chart No. Total Amount

40A(2)(b) 1 XXX

80A(6) 2 XXX

80IA(8) 3 XXX

80IA(10) 4 XXX

10AA 5 XXX

Chapter VI-A 6 XXX

Grand Total XXX

Characteristic Fair Market Value Arm’s Length Pricing

Definition

The price which goods or services would have fetched or cost in the open market

A price which is applied in a transaction in uncontrolled conditions

Computation MechanismNo specific mechanism provided in law

Most appropriate method out of five prescribed methods

Transaction ValueAny market pricing point can be treated as fair market value

Arithmetic mean of comparable prices treated as arm’s length price

Sample SizeOne comparable may be sufficient to establish fair market value

Require bigger sample size for establishing arm’s length

DeviationNo deviation permitted from fair market value

Deviation of plus / minus three percent is permitted

Sec 40A(2)

Assessee Related Party

b(i) Individual Any relative of the assessee u/s 2(41)

b(ii) Where the assessee is a company, firm, AOP or HUF

1)Director of the company, partner of the firm, member of AOP or HUF, or 2)any relative of such director, partner or member

b(iii) 3) An individual having substantial interest in the business or profession or any relative of him(substantial interest means 20% at any time during PY)

b(iv) 4)Any company, firm or AOP or HUF, having a substantial interest in the business or profession of the assessee or any director, partner or member of such company or Firm or HUF or any relative of them orAny other company carrying on business or profession in which the first mentioned company has substantial interest.(w.e.f. 01.04.2013)

b(v) a company, firm, AOP, HUF whose director, partner, member having a substantial interest in the business or profession of the assessee or any director, partner, member of such company, firm, AOP or HUF, or any relative of them

B(vi) A) Any person carrying of business or profession in which assessee or any relative of assessee has substantial interest.

B) Any person carrying on business or profession in which the director, partner or member of company, firm, AOP or HUF or any relative of them has a substantial interest. Then company, firm, AOP or HUF is related to such person.

Y-Director

X LTD

C-Relative

of director

-Y

Nature of Transaction Whether Covered

The X Ltd pays to C Rs. 2 Cr for consultancy services

X ltd procures professional services from Y for Rs. 4 Cr.

Y, relative of A

Nature of Transaction Whether Covered

The X Ltd pays Rs. 2 lacs to Y for consultancy services

X ltd receives payment of 6 Cr. from A for professional services

Y, Director of D LTD

C –Relative of

Y

Nature of Transaction Whether Covered

The X Ltd pays to Y Rs. 4 Cr. for consultancy services

C procures professional services from X ltd for 7 Cr.

Director in Y

ltd

Z director in Y

ltd

C relative of Z

Nature of Transaction Whether Covered

The X Ltd pays Rs. 1 Cr. to A for consultancy services

X ltd provides professional services to C for 5 Cr.

X ltd takes interest free loan from C

X ltd pays remuneration to Z being an employee in X ltd Rs. 2 Cr.

Y, Director of H Ltd

C relative of Y

Nature of Transaction Whether Covered

The X Ltd pays to H ltd for purchase of goods Rs. 2 Cr.

X ltd procures professional services from Y Rs. 3 Cr.

X ltd pays interest to C of Rs. 1Cr for loan taken from him.

Relative of director

4

Relative of partner

4

Relative of member

4

Relative of member

4

Relative of director

3

Relative of partner

3

Relative of

member

Relative of

member 3

Other Directors

3

Other Partners

3

Other members

3

Other family

members 3

Director 2

Partner2

Member2

Member2

Company in which A

is a Director 2

Firm in which A is a Partner

2

AOP in which A is a Member

2

HUF in which A is a Family

Member 2

Company H holding SI in X

1

Firm holding

SI in X 1

AOP holding

SI in X 1

HUF holding SI in X

1

b(v) b(v)

b(v) b(v) b(iv) b(iv) b(iv) b(iv)

b(v) b(v) b(v) b(v) b(iv) b(iv) b(iv) b(iv)

b(v)

Relative of A 2

b(iii)

Individual (A) holding SI in X

1

Relative of A Director

2

Person/Entity in which

Relative holds SI 3

Director1

Person/Entity in which

Relative holds SI 2

Person/Entity in which

Relative holds SI 1

b(iii)

b(ii) b(ii)

b(vi)

Company in which H Co

holds SI 2

Company (X)

b(vi) b(vi)

b(iv)

b (vi)

b(iv) b(iv) b(iv) b(iv)

CA BALDEV RAJ GS-BVSS CA BALDEV RAJ GS-BVSS

There is a company XYZ Ltd which has a three unit, one deals in production of sugar, another garments and one in generation of power. The power is supplied for the production of sugar and cloth. If any shortage comes in the production of power. The power is purchased from state Electricity Board. The power unit is tax free unit.

The power is purchased for production of cloth and sugar at Rs. 5 per unit. However, the rate of state electricity board is 4 per unit. Hence, the profit of power unit is being enhanced which is tax free and other unit is being reduced,

Similarly, there are certain common expenditure which as per accepted accounting principle should be divided into three unit but all the expenses are divided into cloth and sugar unit so as to reduce their profit.

XYZ Ltd

Power Production

Sugar Production

Cloth Production

A ltd provides loan to B Ltd which is more than 50% of its total assets

The manufacture or processing of goods or articles or business carried on by the a assessee is wholly dependent on knowhow, trade mark or any kind of data, documentation provided by other enterprises.

A ltd supplies more than 90% of the raw material to B Ltd for its manufacturing operation.

90% of the goods produced by A Ltd is sold to B Ltd and this is B ltd who determines the price of the goods.

The basic difference between pre and post period of SDT is the method of calculation of price in relation to transaction between related parties. Earlier, it was to be calculated as per FMV and now as per the ALP. The transfer pricing provisions under section 92 of the Act does not impact operation of basic scope of the provision of section 40 (A)(2) or section 80A/80-IA(8) or 80-1A(10). It merely provides that the FMV as contemplated by any of the specified provision will need to be determined in accordance with arm’s length price as defined in section 92 F (ii) of the Act.

Apart from that the taxpayer is required to maintain the contemporaneous documents under section 92 D and furnish accountants report under section 92E of the Income Tax Act.

SDT previously reported/certified but onus on revenue authorities

Obligation now on taxpayer to establish transaction at Arm' length.

Non compliance with ALP would result in disallowance of expenditure in the hands of assessee but no corresponding adjustment will be allowed to the other party leading to economic double taxation.

However, in the case of international transfer pricing, there is a concept of corresponding adjustment under article 9(2) of the OECD MC/ UNMC which should be brought in DTP also.

Section Nature of Default Amount of Penalty

271(1)© Explanation 7

Post Assessment Adjustment on higher side

100 t0 300% of tax on adjusted amount

271 AA Failure to maintain documents or information

2% of the value of SDT

271BA Penalty for failure to furnish report u/s 92E

Rs. One hundred Thousand Rupees

271 G Penalty to furnish information or documents u/s 92 D

2% of the value of SDT

► This amendment will take effect from 1st July,2012.

► The due date for completion of a TP assessments is extended by 3 months.

► The existing and the new extended period for completion of pending proceedings and subsequent proceedings under the provisions is given below :

Proceeding under section

Current time allowed

Sec 143 and 92CA Within 36months of the end of the A Y

148/92CA 36 months from the end of the FY in which notice issued

250/254/263 and 92CA

24 months from the end of the month in which order received

As per the proposed GAAR provisions in Chapter X of the Income Tax Act ,An arrangement whose main purpose is to obtain a tax benefit and which also satisfies at least one of the four tests, can be declared as 'impermissible avoidance agreements'.

The four tests inter alia are: The arrangement that creates rights and obligations, which are

not normally created between parties dealing at arm's length; It results in misuse or abuse of provisions of tax laws; it lacks commercial substance or is deemed to lack commercial

substance. Is carried out in a manner , which is normally not employed for

bonafide purpose.TP Implications will arise mainly if it satisfies any one of

the following two tests : The arrangement that creates rights and obligations, which are

not normally created between parties dealing at arm's length It lacks commercial substance

Documentation for specified Domestic Transaction within the specified time limit

Benchmarking for the specified domestic Transaction-onus on the tax payer

Determining the arm’s length price following six method as provided in the Act

Adjustment in the price-No corresponding adjustment allowed to other party causing double taxation

Preparing TP report Giving audit report in form 3CEB

International TP Domestic TP

• International transactions [Sec 92B]

• Specified domestic transactions [Sec 92BA]

• Shareholding not less than 26% • Shareholding not less than 20%

• No minimum thresh hold for applicability of TP provisions

• Rs. 5 crore is the minimum thresh hold for applicability of TP provisions. If aggregate value of transactions is less than Rs. 5 crore, provisions u/s 40A(2)(a) will be applicable – FMV and not ALP.

• APA coverage is available • APA coverage is not available

International TP vs. Domestic TP

1. If transactions are covered under SDT provisions, disallowance u/s 40A(2)(a) may be made by the AO only when transactions are not at arm’s length. [Proviso to Sec 40A(2)(a)]

2. Software / databases generally used for searches- Prowess, Capitaline Plus

Provisions applicable only to expenditure where payment is made or to be made

◦ Does this include capital expenditure?

◦ Does this include transactions without consideration?

◦ Does threshold apply to the amount recorded in the Books of Account or Amount determined as per ALP?

Wide coverage and goes beyond the related parties covered under AS-18

Whether Government approval u/s 295, 297 of the Companies Act would be relevant?

If aggregate of International and Domestic transaction exceeds INR 50 million, Do we need to demonstrate ALP for Domestic transaction which is otherwise below INR 50 million?

If aggregate of International and Domestic transaction exceeds INR 50 million, but the International Transactions are below INR 10 million, Do we need to maintain documents prescribe under Rule 10D? ( Reference Rule 10D(2)

Would claim of Depreciation comes under the ambit of Domestic Transfer Pricing?

Under which Form, report for Domestic transfer Pricing shall be given?

[ Section 92BA refer Section 92E] [ Prescribed form u/s92E is Form

3CEB which refers to the report on International Transactions] Revised

Form 3CEB shall be notified in order to cover Specific Domestic

Transactions-The form 3CEB has been amended and clause 21

onwards has been introduced providing for reporting on DTP.

Section 92A [AE and Deemed AE] deals with directly or indirectly

interested vis-à-vis Section 40A(2)(b) [Specified Domestic Related

Party] deals with directly interested, however, the circular 6P clause c

provides for directly and indirectly.

Interest free Loans to Group Companies

Granting of Corporate Guarantees/ Performance Guarantees by Parent Company to its subsidiaries

Intra-group purchase/ sell/ service transactions

Payment made to key personnel e.g. transaction with Directors/CFO/CEO etc..

Payment made to key personnel of Group Companies

Payment made to relative of key personnel of the assessee/group companies

Type of payments/ transactions Challenges

• Salary and Bonuses paid to the partners

• Remuneration paid to the Directors

• Transfer of land

• Joint Development agreements• Project management fees• Allocation of expenses between the

same taxpayer having an eligible unit and non-eligible unit

• Definition of Related Party

• Benchmarking?• Whether the limit as mentioned in

section 40 (b) would be the ALP?

• Benchmarking?• Whether the limit as mentioned in

Schedule XIII would be the ALP?

• Whether the rates mentioned in the ready reckoner be considered as ALP?

• Benchmarking?• Benchmarking?• Whether these allocation would be

SDT – Sec 80-IA(10)?

• Directly v/s Indirectly 

a) Transfer pricing provisions are not applicable in case where income is not chargeable to tax at all.

[Amiantit International Holding Ltd., (2010) 322 ITR 678 (AAR)]

b) Provisions of section 40A(2) are not applicable to a co-operative society. [CIT vs. Manjara Shetkari Sahakari Sakhar Karkhana Ltd.(2008) 301 ITR 191

(Bom.)]

d) When a person commits an offence by not maintaining the books of accounts as contemplated by section 44AA, the offence is complete. After that there can be no possibility of any offence as contemplated by section 44AB and therefore, the imposition of penalty is erroneous. [Surajmal Parasmal Todi vs. CIT (1996) 222 ITR 691 (Gauhati)] Note : This decision may be helpful in the context of sections 271AA, 271G and 271BA.

e) Correlative adjustments - if excessive or unreasonable expenses are disallowed in the hands of tax payer at time of the assessment then corresponding adjustment to the income of the recipient will not be allowed in the hands of recipient of income. Hence, it would lead to double taxation in India.

Expenses paid by domestic companies to related parties will be challengedCorresponding adjustment not permitted for disallowed expenses; will lead to double

taxation

Transaction within CompanyCompany with multiple units and claiming tax holiday will be questioned on inter unit

transfersAuthorities will attempt to reduce profitability of exempted unit by reducing the quantum of

deduction Tax Holiday

Companies declaring ‘More than ordinary Profits’ for tax holiday units will loose excessive income-tax benefits

Shift of ApproachApproach will shift from generic ‘Fair Market Value’ concept to Arm’s Length pricing

Compliance Heavy Compliance burden of maintaining:

transfer pricing documentation and reporting of transactions (Form 3CEB) Assessment

Assessment / audit by specialized cell of TPO

There should be a definition of close connection and the word any other reason should be defined. It should not be left vague.

CBDT should issue a circular for how to determine benchmarking for director’s remuneration or in some other typical issues.